The popularity of non-fungible tokens (NFTs) skyrocketed in 2021. The sale of the multi-million dollar blockchain-based certificates of ownership encompassed everything from a signed tweet to virtual sneakers. Not everyone is impressed. The steep carbon footprint of digital assets annoys environmentalists; its opacity worries those fighting money laundering and tax evasion.
The art market already offers money laundering opportunities. Secrecy is pervasive, according to a Senate report last year. But the difficulty of transporting and storing art doesn’t apply to NFTs. By buying and reselling NFTs, criminals can move coins associated with illegal activity into wallets unrelated to them.
Sales of individual NFTs at record prices are too high to be suspicious. But the tax authorities are not in control of the NFT market. It’s worth $ 14 billion this year, according to Jefferies, and it’s growing rapidly. NFTs are inherently invisible, Internal Revenue Service chief Charles Rettig said earlier this year when he warned that cryptocurrencies are contributing to a $ 1 trillion annual deficit in U.S. tax revenues.
Tax rules need to be better defined. Most tax authorities consider cryptos to be a type of property, like stocks or paintings, so taxes can be levied on profits. However, there are disputes about which jurisdiction should have tax rights. There is also discussion about which NFTs should be taxed. The latest global money laundering guidelines only target NFTs with investment or payment applications.
Tax authorities need better data. The largest source of revenue in President Joe Biden’s Infrastructure Act – valued at $ 28 billion over a decade – includes rules that require brokers to disclose crypto transactions, possibly including those that involve NFTs. Controversially, this could drive blockchain projects abroad. A new bill tries to water down the reform.
Tax collection has likely always been fraught with difficulty for an industry with libertarian roots. But the tax authorities won’t be ready to overlook a market that is projected to quintuple to more than $ 75 billion in the next four years. Nor should they, given the bypass options offered by NFTs.
The Lex team is keen to hear more from the readers. Please let us know what you think of NFTs and tax evasion in the comments below.
Source: Crypto News Austria